Mandatory Requirement of Conversion of Physical Shares to Demat Form

The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, introduced Rule 9B, requiring private companies (excluding small companies) to convert their physical securities into demat form by 30/09/2024. This article explores the implications of this mandatory requirement and the consequences of non-compliance.

Insertion of rule-9B in Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023

• As per the new amendment every private company which has not been classified as small company shall mandatorily convert their existing physical securities into demat form within 18 months of end of F.Y. 2023. (i.e. 30/09/2024)
• SMALL COMPANY:- (SECTION-2 (85) OF THE COMPANIES ACT, 2013) (Notification no: CG- DL-E­15092022-238857)

> Small company means a company, other than a public company,—

• Paid-up share capital of which does not exceed 4 crore rupees or such higher amount as may be prescribed which shall not be more than 10 crore rupees; and
• Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 40 crore rupees or such higher amount as may be prescribed which shall not be more than 100 crore rupees:

> Exceptions:-

• • A holding company or a subsidiary company;
  • A company registered under section 8; or
  • A company or body corporate governed by any special Act.
• Consequences of non-dematerialization of physical security into demat on or before 30/09/2024:

1. After the due date company shall not be able to undertake

a) Issue any securities

b) buyback of securities

c) issue bonus shares

d) Offer for right issue of securities

2. After the due date Security holders shall not be able to transfer the securities of the company or subscribe further issue of securities.

3. Penalty would be levied on the Company under the provisions of section 450 of the Companies act, 2013 as no specific penalty has been provided for the said non­compliance under the act.

a) The penalty to be levied under Section-450 of the Companies Act, 2013 is as mentioned hereunder:

• • “Fine which may extend to Rs. 10,000 and in case of continuous contravention, a further fine of which may extend to Rs. 1,000 per day after the first during which the contravention continues.”

√ Hence the above notification shall be applicable on the following companies:

1. Private companies with turnover of more than 40 crore

2. Private companies with paid up capital of more than 4 crore

3. Section-8 companies

4. Company which is a holding or subsidiary company of other company

5. Company or body corporate governed under special act.

6. Foreign company issuing shares in India

7. Indian company being subsidiary of foreign company.

Conclusion: Failure to convert physical securities into demat form by the specified deadline carries significant repercussions for private companies. They risk being unable to issue securities, undertake buybacks, issue bonus shares, or offer right issues. Moreover, security holders may face restrictions on transferring securities or subscribing to further issues. Non-compliance also attracts penalties under Section 450 of the Companies Act, 2013, emphasizing the importance of adhering to the new mandate.